How many times has the term “artificial intelligence” crossed your mind lately? Whether you think of artificial intelligence (AI) as an ethical conundrum or a positive breakthrough, it is undeniable that AI is already having an impact. Experts predict a productivity injection that could accelerate GDP by as much as 1.5 percentage points annually. That takes my breath away.

Generative AI, like ChatGPT, is artificial intelligence that automates tasks and creates new content across languages and media. It can draft text, paint images, compose computer code, and write music. You can imagine why the world seems to be on the cusp of a revolution that will transform our lives in countless ways. No matter how you view and use AI, every industry is adapting and implementing it as tools become more widely available.

In terms of investments, AI has the potential to create enormous wealth. The convergence of internet content, speed, cost, and technological development has brought this prospect to the forefront. 

And AI has already sparked a leap in stocks. In the first half of 2023, some of the largest companies in the U.S., including Apple, Alphabet, Amazon, NVIDIA, Microsoft, and Meta, to name a few with direct ties to AI technology development, led a significant stock market upturn.

Many of my clients are interested in identifying investments with big AI potential, including investing in stocks of companies that are not yet household names. They wonder how AI can help them grow their wealth. As with many things AI-related, the answer lies in using human intelligence first to guide you and design the guardrails.

Getting Started

As I work with my clients, every conversation about investments begins with an exploration of goals and risks.  When clients come to me excited about investing in AI-driven companies, we zoom out to the big picture and ask questions to assess the opportunity for them as an individual, couple, or family:  

• What does the client’s existing portfolio look like, and what exposure to AI is already present in the client’s investment lineup? What shock absorbers are present to preserve capital in the lean years?
• Does the client’s portfolio have any underlying correlations with the AI theme in their investments, such as employee stock ownership, which has already exposed them to AI upside and risks? 
• Do they understand the potential downside in small-cap companies focused on emerging technologies?  
• If we ring-fence some assets in an AI-focused strategy, how might the long-term plan be affected? What is the range of outcomes on the client’s wealth and well-being in the long term if the strategy succeeds or fails? 
• Is there another investment that would be a better fit to help them meet their goals? 
• Is my client truly a long-term investor, prepared to stomach perhaps breathtaking losses and market volatility, or potentially lose all their money invested in a speculative strategy focused on emerging technology?

Clearly, no single answer applies to everyone.

Investing in an Artificial Intelligence (AI) Strategy

Whether you have your eyes set on a well-known, mega-cap tech company or a smaller firm with potential, AI is a nascent technology. Predicting the winners and losers requires research, judgment, and ecosystem knowledge. It also means staying tuned in to stock price movements, new product announcements, corporate earnings reports, consolidation opportunities, and more. As part of CAPTRUST’s portfolio strategist team, I work closely with the team that developed our firm’s AI strategy, which required diligent research into the AI landscape and application of the research analysts’ investment disciplines.

If you are interested in AI investments, before you invest, I encourage you to do the same. Learn about the AI value chain and become a student of the theme. Risks abound, and AI strategies will not be right for everyone. 

If you do decide to invest, it may be a good idea to partner with a financial advisor who has AI-specific knowledge or can offer an actively managed AI-centric investment portfolio. The best of these portfolios will include a diversity of mega-cap tech leaders and small-cap companies that are participating in AI emergence across the value chain. Diversification of this sort can help to manage some of the risks associated with investing in new technology. 

To understand whether my own clients might be good candidates for an AI strategy, I start by looking at their holistic financial picture to discern whether an AI strategy might be additive. Typically, it is my most speculative clients who ask about AI investment. However, I have a number of clients with high-risk appetites who may stand to benefit from an AI strategy. Each one requires a unique level and method of risk control. 

Together, we discuss their goals, cash-flow needs, and time horizon and how investing in an AI strategy could impact each of these elements. Then, we can determine how—and where—AI fits into their wealth picture and how big or small their AI position could be. 

Is This Speculation or Investing?

Investing in any technology-focused strategy is speculative and tends to be more volatile than traditional strategies. Emerging technology strategies focused on AI and machine learning may be even more volatile. The risk of loss is significant. Many companies are either very expensive, relative to their current earnings levels, or could be more profitable. Also, the business models related to AI and machine learning may take longer than expected to come to fruition, which would likely result in declines in many or all of these stocks. 

How should investors use a portfolio like this one? With all the warnings and disclosures affixed to this strategy, it’s clear that allocation size is key. Its best use also depends on the investor’s investment philosophy, risk tolerance, time horizon, and objectives.

How Does This Align with My Financial Plan?

Dominating the consideration of how owning AI stocks could fit into each client’s holistic, long-term investment plan is the risk. AI is an opportunity that may take years to play out or may become overvalued quickly, and it will definitely be volatile.  

As fiduciaries, CAPTRUST advisors are aligned with our client’s best interests in growing wealth and managing risk. Consequently, this strategy has no management fee. It is included in our overall advisory fee. Our conflict-free model and our adherence to the fiduciary standard means we will discourage people who cannot tolerate the risk from investing in a speculative strategy. 

No two clients are alike, and one size does not fit all. Here is a simplified, hypothetical client case: A person in their 40s with $1 million in a rollover IRA and $1 million in taxable investments might consider a limited allocation to the CAPTRUST AI Strategy in a Roth IRA. The higher expected growth rate of small- cap growth strategies combined with the tax-free features of Roth IRAs—no capital gains considerations and no income tax on distribution—could make sense for this individual depending on their goals, ultimate intentions for the Roth IRA, and current investments.

That said, clients must understand that this brand-new strategy is not appropriate for all investors. Risks include, but are not limited to, loss of principal, information technology industry concentration risk, and small or new issuer risk. 

The Bottom Line

If AI excites you, let’s discuss your particular situation and whether a commitment to AI stocks might be appropriate. I bring CAPTRUST’s collective investment expertise and planning power to bear on every engagement and every decision I make for clients. The CAPTRUST AI Strategy is just one example of the depth, access, and leverage that we can put to work for you.